Few options for $1 billion spending gap

FRANKFORT — Kentucky lawmakers, facing a familiarly dismal state economy, don't seem to have many options when it comes to filling a possible budget shortfall of more than $1 billion.

Lawmakers might consider cutting government programs and services, raising more money either through higher taxes or fees, or a combination of both. There is one added twist that might soften Kentucky's harsh financial reality: federal stimulus money.

"We're going to solve this because we have to," said Gov. Steve Beshear. "We don't have any choice."

Beshear announced last week that his administration's internal projections show that Kentucky might face a budget shortfall that eclipses $1 billion. The governor expects an official projection from a statewide team of economic experts, but he said internal numbers predict that Kentucky's budget shortfall in the fiscal year that starts July 1 might range from $818 million to $1.1 billion.

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Kentucky already is coming off a year filled with budget cuts and tax hikes as state lawmakers offset a $456 million revenue shortfall in the fiscal year that ends June 30. Lawmakers approved a budgetary fix earlier this year that included tax increases on cigarettes and cuts in government services and agencies.

Cuts of some degree are likely next year, officials said. But whether state legislators are ready to approve tax increases to raise money two years in a row remains to be seen.

Kentucky's total share of the federal stimulus money is about $3 billion, and $650 million of that money can be used specifically help stabilize the state budget, Beshear said.

"If we didn't have it, we would be in terrible shape," said Rep. Rick Rand, chairman of the House budget committee. "This gives us another option. I think it's going to be very helpful, and it could potentially save employee layoffs."

Earlier this year, lawmakers chose to leave the federal stimulus money largely intact, said Rand, D-Bedford. That positions the state better for the coming financial angst because it's still available, Rand said.

Using the stimulus money to plug state budget holes, however, won't boost the economy and will only delay monetary problems, said Jim Waters, a spokesman for the Bluegrass Institute in Bowling Green.

"That's like putting a Band-Aid on a gaping wound that's about to make your leg fall off," Waters said. "That's not going to address our long-term budget predicament."

But state Rep. David Floyd, a Bardstown Republican, said the option of tapping stimulus dollars sounds like "a wise use of those funds in order to keep critical services going and avoid tax increases."

Other lawmakers have called for a massive overhaul of the state's tax code.

Rep. Jim Wayne, a Louisville Democrat, said earlier this year that he wanted the General Assembly to begin looking at a plan to restructure the state's tax code to bring in more revenue.

Rep. Bill Farmer, a Lexington Republican, has proposed a plan that would eliminate income taxes and instead place a 5.5 percent sales tax on all goods and services. Now, when the economy is down, is the proper time for legislators to consider such a proposal, Farmer said.

Farmer said he expected that a legislative panel would hold a hearing on the plan later this month.

"If the economy is good, overhauling the tax system is a headache," Farmer said. "You've got to do it when times are bad."

House Speaker Greg Stumbo, D-Prestonsburg, has proposed allowing video gambling terminals at race tracks to generate additional revenue. The plan did not come up for a vote during the legislative session earlier this year, but Stumbo claimed that the plan could eventually generate about $350 million a year.

Beshear, who has been a proponent of allowing casino gambling in Kentucky, did not dismiss the idea when asked about it last week.

"In my mind, I think all issues are on the table," Beshear said. "I'll be thinking about all of this as we move forward."